Challenges and Opportunities of India's Manufacturing Sector

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CIA-5A: Article Review on “Challenges and Opportunities of India's Manufacturing Sector”

Name: Shyam Singh D

Registration No: 1628921

Subject:  Management Control System

Date: 19/07/2017

Summary:

The article speaks largely on the opportunity and improvements in manufacturing segment by comparing the extensive growth in other sectors like Financial services and IT. India has undertaken extensive reforms in its manufacturing sector in the last two decades. However, an acceleration of growth in manufacturing and an associated increase in employment has evaded India. In particular, industries dependent on infrastructure or external finance and labour-intensive industries have not been able to reap the maximum benefits of reforms.

The manufacturing sector has contributed little to income growth and its share in total commodities exports has been declining. This is especially harmful as manufacturing is highly dependent on infrastructure. Stronger manufacturing would increase productivity and make growth more visible Manufacturing has not brought in much new employment and most of the recent rise in manufacturing employment has been where workers are not covered by social security arrangements(SSA) i.e. Employee’s Provident Fund (EPF).

Productivity of the manufacturing sector is low. Partly because of large number of small size manufacturing firms makes it difficult to exploit economies of scale. Despite low-skilled and relatively cheap labour, Indian manufacturing is surprisingly capital and skill intensive. Furthermore, firms have little incentive to grow, Since by staying small they can avoid taxes and complex labour regulations. Land acquisition is slow, Companies face frequent power outages and transport infrastructure is below balance. In particular, India should aim for more formal jobs, as these tend to be the most secure and of highest productivity.

Author`s Focus:

Challenging environment have taken a big leap of growth for Service sector compared to agriculture, Manufacturing and other non- manufacturing sectors. Very surprisingly even with the help of various reforms like eliminating licencing for industries and trade liberalisation with stringent rules from the year 1990 has had less impact. Rather manufacturing has always been constant i.e. 13% of the GDP only.

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Productivity in India has been low than emerging countries. There have been 65% employment in the small industries with less than 10 employees. The productivity problems in the country has predominantly been due to large number of small firms with low productivity thereby not utilising the economies of scale. But the truth is that firms like these do not intent to grow profits so that by staying small they can avoid the regulations and taxes imposed by the government.

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* Productivity factor means Value addition created by the worker in rupees. It could be in terms of Creativity and Technological innovations.

With the above data, we observe that the highest productivity factor seen in telecommunication, Financial services in banking sector. Large improvements are also seen in Hotel Industries. Capital services/investments have increased extensively in Energy sector like Petroleum refinery and Nuclear fuel.

 Importantly Productivity factor has seen the negative side in the Wood related products, mining and other natural resources related industries, As the government rules and regulation have been stringent on the Animal and wildlife prote3ction and the eco-system rehabilitation.

When compared to India amongst other related countries, the share of manufactured goods in total merchandise exports fell from 77% in 2003 to 65% in 2013 India’s share in world manufacturing export stood at 1.7% in 2010 compared to 14% for China.

The latest competitive industrial performance index ranks India far behind China.

Global Comparisons to Manufacturing:

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India Has lower manufacturing sub sectors like Transportation Equipment, Chemical manufacturing, Food Manufacturing, Paper Manufacturing and Huge machinery manufacturing. This can happen due to the available of raw material and the resources required to process.

But on the other hand, India has been exceptionally stronger in the service sectors due to the rising prices of labour across the united states and resulting in off-shoring the services to India for the rich talent available economically. The cost of labour in India has remained relatively low.

India should better the channel of employment from low productivity agriculture to higher productivity manufacturing and services, which would raise wages and living standards for a larger share of the population. Furthermore, India should aim for more formal jobs in the organised manufacturing sector, as these tend to be the most secure and of highest productivity.

Overcoming the Obstacles in Manufacturing:

The government of India has taken many initiatives to bring up the employment across the Tier-1 and Tier -2 cities. One of the initiatives is the "Smart City" initiative. This encourages the investors to bring in extra capital and likewise there are supports rendered to the setting up of industrial areas. While these plans are welcome, India could do more to address fundamental problems with the overall business environment. Currently, policies rely heavily on the economic zones that provide exemptions from many existing policies such as labour regulations, taxation or business creation.

When zones are set up to boost employment and growth, they are successful mostly if they can have a wider impact on the economy. Special Economic Zones(SEZ) not only ensures the use of barren land but to benefit the organizations to exemption from Taxes, set up Townships and provide better standards of living. Example Jharkhand (Underdeveloped area before TATA invested heavily), Kutch (earlier destroyed due to heavy earthquakes) and Belgaum. Furthermore, by signing free-trade agreements with countries where duties on many products have been eliminated or reduced the advantages accruing to SEZs have been reduced further.

Make in India Initiative was bought into light by the current Prime Minister, This is an initiative to bring all foreign companies to the country and invest here. Make in India`s sole intention is to provide effective and easy governance to help India become a global manufacturing hub. Make in India will focus on creating jobs and enhance skills in these sectors, which include capital goods and engineering, defence equipment, pharmaceuticals, food processing, auto and auto components, textiles and electronics. Government departments are asked to streamline approval processes. The government to give all the clearances within 3 months. A complete approach is pictured, including modifying labour laws, developing skills, easing FDI policies and improving infrastructure.